The Virtuous Circle: Private Equity and Sustainability

Sustainability is a critical element of the long-term future of the private equity and venture capital value creation model.

But private capital is also essential in delivering on global sustainability issues, creating a virtuous circle.

In a landscape where geopolitics has intensified sustainability challenges and where environmental and social issues have come to the fore, the picture is as complex as ever, and all participants in the PE space need to be on the front foot, as Jon Masters, Senior Director at JTC, explains:

Speakers at the BVCA Private Capital and Sustainability Conference last month made a strong case for an interconnected and mutually beneficial relationship between sustainability and private capital. Building businesses that are resilient to sustainability risks, and clearly articulating the value creation this resilience offers, is not just sensible – it is essential to the long-term viability of markets.

Private Equity and Venture Capital

The UK Government is acutely aware of this as was evident at this year’s event,. The National Wealth Fund (NWF), launched last year, represents a £27.8bn opportunity to play a part in greening the economy and bringing about transformational change for the planet – with the aim of catalysing private sector investment. Only this week additional funding has been provided to facilitate lending to Sizewell C.

“The commitment of public funding on this scale to focus on the long-term sustainability of the economy through the NWF is an important step,” explains Jon.

“But it’s not just about public spending – it’s about the opportunities that spending can bring about for private sector investment. Public spending alone can’t fill the funding gap needed to meet sustainability targets; private capital will need to step in and play its part too, and the UK Government’s commitments can create channels to accelerate that.”

Global trajectory

Meanwhile, there’s no doubt that geopolitics is impacting the optics through which sustainability is viewed in the private capital space, from the politicisation of ESG in the US, to supply chain disruption caused by tariffs, and evolving regulation and disclosure rules. The global trajectory is one of complexity.

These are short-term distractions, and taking a longer-term view is critical.

“The sustainability journey continues to be a bumpy one,” says Jon. “From a regulatory perspective, different locations are still working around different frameworks, with diverse reporting and disclosure requirements, creating a fragmented landscape that can be difficult and resource-heavy for the investment sector to work with. Over time this may ease with increasing adoption of global standards such as the ISSB (International Sustainability Standards Board).”

“What we must not lose sight of is the long game. A lot of work continues to go into enhancing regional regulatory frameworks so that they can work in harmony with each other. That will be a big factor in enabling high quality capital to meet sustainability objectives.”

With that in mind, the recently announced postponement in the EU of additional phased-in reporting requirements set out in the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) will be welcomed by industry participants, as an opportunity to take stock, reflect on their obligations and strategies, and prepare for the future.

Looking ahead

With an eye on the future, and despite regulatory complexity and the uncertainty created by geopolitics, the UK continues to offer good opportunities for sustainability-driven private investment, in particular within the transition finance space.

The publication of the Transition Finance Market Review (TFMR) towards the end of 2024 was a key moment in asserting the UK’s commitment to decarbonisation, providing a roadmap for a transition finance market that can support the UK’s (and global) net zero goals moving through 2025 and beyond.

“The UK is well set up as a hub for driving excellence in the transition finance space,” explains Jon.

“The political commitment is there, there is a good regulatory framework in place and a focus on the real economy – all of which provides a good opportunity for private capital to play a role in helping to scale and invest in transition finance. This will continue to be a growth area in the months and years ahead.”

Any change driven by investment needs to happen quickly. 2024 was the hottest year on record, with new highs in fossil fuel emissions. What has been done before simply will not work going forward; new approaches, new systems and new thinking is critical if progress is to be made.

AI will undoubtedly be part of that drive for progress, being able to capture and analyse key data sets to create a picture that can deliver value, identify opportunities and gaps, and model future environmental and social trends to support more direct and targeted investment.

“What the private capital sector needs to do, all along the value chain, is adopt a more integrated approach to nature, build sustainability into its risk profiles and direct investment into solutions,” says Jon. “This is how we will have a long-term impact – built around inclusive, ethical and environmentally conscious business and investment practices.”

Adopting such an approach will ensure that private capital and sustainability will continue to enjoy a mutually beneficial relationship.